Can we charge our subsidiary for head office costs?
You can, but the charge has to survive three questions. Did the subsidiary receive an actual benefit it would otherwise have paid an outsider for, or performed itself? Does the allocation key reflect that benefit rather than merely being easy to calculate? Have shareholder costs, which are incurred for the parent's own ownership interest, been stripped out before the pool was allocated? Where those three are evidenced, the charge is an ordinary intercompany service. Where they are not, the paying company loses the deduction and the receiving company is still taxed on the income, so the group pays tax on the same amount in both places.
What is the difference between a shareholder cost and a real service?
A shareholder cost is incurred because the parent owns the group: consolidating the accounts, meeting the parent's own reporting obligations, managing the shareholding, raising capital for the parent itself. The subsidiary gets nothing it would have bought on its own behalf. A service is something the subsidiary needed and would otherwise have hired someone to do, or done itself: running its payroll, supporting its systems, managing its supply chain. The distinction decides deductibility, so it has to be made when the cost pool is built, not when an auditor asks. Pools assembled from a general ledger with nothing excluded almost always contain both.
Our parent bills us a management fee, so is it deductible here?
Only if it can be shown to buy something. A single annual invoice reading "management fee" with no description, no supporting cost pool and no agreement behind it is the classic denial. What supports the deduction is evidence that identifiable services were performed for your company, that the cost pool behind the charge excluded the parent's own ownership costs, and that the share you were allocated reflects the benefit you received. Ask the parent for the composition of the pool and the basis on which it was split. If nobody in the group can produce those, the deduction is exposed whatever the invoice says.
What allocation key should we use for shared IT costs?
Choose the measure that tracks who actually benefits, and be able to explain why you chose it. Users, devices, transactions processed or storage consumed can all be defensible for shared systems, depending on what the cost pool contains. Revenue is the key most often used and the hardest to justify, because a company's turnover rarely determines how much of a shared system it consumes. The key matters more than people expect: an allocation that is arithmetically neat but bears no relation to benefit invites an adjustment even where the underlying service is genuine. Review the key when the business changes shape, not once at the start.
Do we need a written agreement for intercompany cost allocations?
You need one, and it should exist before the costs are charged rather than after a question arrives. The agreement should record who participates, what the pool covers, what has been excluded, how the allocation key works and how it is reviewed. That document does not by itself prove the benefit, but its absence makes every other element harder to establish, because the arrangement then has to be reconstructed from invoices and memory. Agreements signed with a retrospective date after an audit notice do more harm than good. Draft it when the arrangement starts and amend it when the arrangement changes.
Why was our management fee denied here but still taxed abroad?
Because each country decides its own side of the transaction and neither is obliged to follow the other. The paying country tests whether the deduction is justified by benefit, allocation and exclusion of shareholder costs. The receiving country simply sees income arriving and taxes it. If the deduction fails, nothing automatically reverses the receipt, and the group has been taxed twice on the same amount. Treaty relief may be available but it takes time and evidence. The practical answer is to build the file that supports the deduction in the paying country before the charge is raised, not after it is denied.
Should I use a branch or a subsidiary abroad?
A branch is the same legal entity operating in another country, so its profits and losses sit with the parent and it is taxed there as a permanent establishment. A subsidiary is a separate company, taxed in its own right, with dividends and withholding on the way home. Losses, repatriation cost and liability usually decide it, and the answer differs by country pair. See branch vs subsidiary.
What is FAPI, and how does it differ from GILTI?
Canada's foreign accrual property income taxes a Canadian shareholder currently on the passive income of a controlled foreign affiliate — interest, rent, royalties, certain gains — with a deduction that recognises foreign tax already paid on it. GILTI comes at the problem from the opposite side: it targets active income above a return on tangible assets. A group with both a Canadian and a US shareholder can therefore be inside both regimes on different slices of the same profit. See GILTI against FAPI.
